How Should I Pay Off Negative Items on My Credit Report?

Negative items on your credit report vary. From tax liens to defaulted credit cards and collection accounts, all negative items on your credit report damage your credit rating. While paying off your bad debts does not cause the credit bureaus to remove them from your credit record, paid debts look better to prospective creditors than obligations you ignore. Paying off negative items properly benefits your credit score more than simply paying off each account off at random.

Original Creditors First

If your credit report contains negative entries from original creditors, such as a bank or credit card company, pay off the original creditor before you move on to other debts. If you leave the account unpaid for a long enough period of time -- usually six months, but this time period varies by lender -- the lender charges off the debt. Collection agencies purchase charged off accounts. Once a debt collector owns your debt, it will add a subsequent negative notation on your credit file. You can avoid further damage by paying off debts before your creditors send them to collections.

Pay in Full

For an individual trying to pay off old delinquencies, the prospect of a settlement can be tempting. Unless you're dealing with a collection agency, however, don't risk it. While making payments on your delinquent debt does not make it appear more recent in the eyes of the credit scoring formulas, paying only a portion of what you owe leaves a notation on your credit report that the debt was "settled." This updates the negative item in your credit history and lowers your score. If possible, always pay in full.

Negotiate Credit Reporting

Any creditor that can report accounts to the credit bureaus can also amend the information it reports. If you cannot pay your debt in full, try to negotiate the way your creditor reports the account to the credit bureaus.

While not all creditors will do so, some will amend certain aspects of their credit reports in exchange for payment. For example, a credit card company removing a missed payment notation improves your credit rating. Collection agency reports are always detrimental to your scores. If you can convince a collection agency to remove its account from your credit file upon receiving payment, however, your credit score will improve.

How to Pay

Even if you intend to pay off debts you owe, doing so is sometimes difficult -- especially for those living on a fixed income. Each creditor has the right to dictate how it will accept payment, but many would rather grant you a payment plan than not receive payment at all -- saving you from having to save up for a lump-sum payment.

Credit counseling organizations can also help you get out of debt by teaching you more successful debt management techniques and helping your organize a working budget that allows you to meet your daily needs and also pay off your debts over time.